After analyzing third quarter data, Borst gives China a “B” but says the country’s efforts to alleviate the slowdown could work against it:

“The third quarter showed a slight improvement for China in terms of rebalancing indicators. While there were no major changes, things continue to move in the right direction, albeit more slowly than optimal. One lingering question is the extent to which this rebalancing is the result of weak GDP growth. A sharp pickup in growth next year, especially if it’s driven by stimulus-funded investment, could undo some of the progress that has been made,” he writes.

Indicators include disposable income growth versus GDP, real interest rate on deposit, residential real estate investment growth and loans to small enterprises as a part of the total enterprise loan pie.

With all the concern about China, it seems like more strategists are finding reasons for optimism in the country’s domestic demand story, as I wrote about earlier this week in my column. Today, Minggao Shen, head of Citi’s China research, says urbanization will likely be key to rebalancing China’s economy and for the next leg of growth –and that’s good news for a host of firms.

The scale of that urbanization has no precedent, with as many as about 600 million people moving to the cities in the next 20 years, Shen says. While authorities are encouraging farmers to migrate to local small towns rather than overcrowding large cities, migrant workers will likely follow job opportunities. As a result, Shen thinks the urbanization will occur in megaregions or urban zones, in part because of the development of high speed rail systems and also because of where college student enrollment is high.

“Five mega-regions may gradually emerge as the key centers of urbanization, led by what we term the “XYZ” urban zones in the Pan Bohai Bay Area (X), Pearl River Delta (Y, including Hong Kong and Macau) and Yangtze River Delta (Z). These three regions accounted for 28% of China’s population and 41% its GDP in 2011, and will likely gain further in the next two decades given their locational advantages,” he writes.

Shen notes that inland China that is trying to catch up with the country’s more popular coastal cities is following a different path of growth, rooted in infrastructure investment funded by bank loans. Non-performing loans in inland banks may rise as a result of any economic slowdown.

The pace of reforms will likely determine the rate of urbanization, but the “urbanization dividend” should support sustained growth of 6-8% in the coming decade, Shen writes.

Who wins? Shen says the services sector will be the biggest beneficiary, including IT, financial, healthcare and education companies. Others that stand to benefit include infrastructure and manufacturing firms like those providing water supply and sewage, as well as construction machinery. Agriculture and property firms.

Separately, Sinopharm is also a holding for Lei Wang, co-manager of the $5.5 billion Thornburg International Value fund (TGVAX). Wang tells Barrons.com that the distributor of drugs from manufacturers to hospitals stands to benefit as China creates safety nets for its citizens, including universal health care.

Goldman Sachs’ Jim O’Neill, the man who will forever be described as the guy who coined the term BRICs, outlines what a Chinese hard landing would look like if nominal economic growth averaged 7% for the remainder of the decade. He argues that a Mitt Romney White House could feed fears of a hard landing because of Romney’s anti-China rhetoric.

So here’s his look at the 7% pessimistic outlook: “China’s GDP would still be some $ 13.5 trillion in 2020, and even if the consumer remained stuck at 35% of GDP, it will have increased by another $ 2.1 trillion. To put this in perspective, the total size of India is yet to breach $ 2 trillion,” O’Neill writes.

O’Neill says he finds it “very difficult to see the Chinese consumer representing such a low share of GDP with such low overall nominal GDP growth.” While Chinese economic growth is slowing, weak exports and investment are the primary culprits. Private consumption is already close to 40% of GDP. ”Even in a really persistently weak Chinese nominal GDP scenario, the numbers increase quite a lot, creating plenty of income for some,” O’Neill says.

Anyway, O’Neill argues that in a worse-case scenario the Chinese government is “surely to step in.” That leads him to conclude the Chinese leadership isn’t excessively bothered about what markets necessarily imply.

“I also believe they are focused on trying to genuinely rebalance the economy and not rush to stimulate parts of it which they have regretted doing too much and/or quickly in the past…Alternatively, and especially if one of the reasons is policymakers have not understood the transition challenges, when they realize genuine GDP growth is underperforming their assumptions and desire, the policymakers will do something about it. In turn, key leading indicators, and both economic and financial conditions will start to improve notably,” he writes.

Another explanation: “Especially without the government-backed support for monopolistic-type behaviour for State Owned Enterprises (SOE’s) going forward, it is distinctly possible that China will continue to have robust growth. However, it will be very difficult to make money by investing directly in Chinese equities. Non-Chinese based businesses that do the hard work for an investor could continue to be the better bet,” O’Neill writes.

(By the looks of the Chinese market, it seems like investors may be coming to that very decision lately. The SPDR S&P China ETF (GXC) is down 7.5% over the past year. And Credit Suisse strategists today cut their rating on China to a neutral from overweight.)

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.